Does Kurabo Industries (TSE:3106) Have A Healthy Balance Sheet?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. Importantly, Kurabo Industries Ltd. (TSE:3106) does carry debt. But the more important question is: how much risk is that debt creating?

We've found 21 US stocks that are forecast to pay a dividend yield of over 6% next year. See the full list for free.

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

What Is Kurabo Industries's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Kurabo Industries had JP¥11.8b of debt in December 2024, down from JP¥17.5b, one year before. However, it does have JP¥14.4b in cash offsetting this, leading to net cash of JP¥2.59b.

A Look At Kurabo Industries' Liabilities

Zooming in on the latest balance sheet data, we can see that Kurabo Industries had liabilities of JP¥44.0b due within 12 months and liabilities of JP¥32.6b due beyond that. On the other hand, it had cash of JP¥14.4b and JP¥38.7b worth of receivables due within a year. So its liabilities total JP¥23.5b more than the combination of its cash and short-term receivables.

Kurabo Industries has a market capitalization of JP¥96.2b, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. While it does have liabilities worth noting, Kurabo Industries also has more cash than debt, so we're pretty confident it can manage its debt safely.

Check out our latest analysis for Kurabo Industries

Also good is that Kurabo Industries grew its EBIT at 17% over the last year, further increasing its ability to manage debt. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Kurabo Industries will need earnings to service that debt. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. Kurabo Industries may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. In the last three years, Kurabo Industries's free cash flow amounted to 45% of its EBIT, less than we'd expect. That's not great, when it comes to paying down debt.

Summing Up

Although Kurabo Industries's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of JP¥2.59b. And it impressed us with its EBIT growth of 17% over the last year. So we are not troubled with Kurabo Industries's debt use. Given Kurabo Industries has a strong balance sheet is profitable and pays a dividend, it would be good to know how fast its dividends are growing, if at all. You can find out instantly by clicking this link.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.